As Its Economy Sags, India Asks a Critic to Come Home and Help Out

Raghuram G. Rajan criticized Indian policy makers during a speech in April at the Indian School of Business. In August, the Indian government offered him a job.Credit
Indian School of Business (ISB)

NEW DELHI — In April, the economist Raghuram G. Rajan gave a speech to a group of graduating Indian students in which he criticized the country’s policy makers for “repeating failed experiment after failed experiment,” rather than learning from the experiences of other countries. A week later, he assailed the government again, this time in a speech attended by Prime Minister Manmohan Singh.

But instead of drawing a rebuke from India’s often thin-skinned leaders, he got a job offer. In August, Mr. Singh, who has frequently sought Mr. Rajan’s advice, called and asked him to take a leave from his job as a professor at the University of Chicago to return to India, where he was born, to help revive the country’s flagging economy. Within weeks, he was at work as the chief economic adviser in the Finance Ministry.

Analysts say the appointment of an outspoken academic like Mr. Rajan, along with the recent push by New Delhi to reduce energy subsidies and open up retailing, insurance and aviation to foreign investment, signal that India’s policy makers appear to be serious about tackling the nation’s economic problems.

Mr. Rajan has advocated changing India’s financial system, which is dominated by state-owned banks, by among other things loosening government restrictions on foreign banks and other financial institutions. He has also been critical of the country’s crony capitalism, likening its business tycoons to Russia’s oligarchs. He has argued that India needs to build stronger, impartial agencies to make the allotment of licenses and natural resources more transparent.

Economists say Mr. Rajan, and his boss, the recently reappointed finance minister, Palaniappan Chidambaram, face daunting challenges in their effort to revive the slowing economy, which is expected to post growth of 5.5 percent this year, down from an average of 7.7 percent a year over the last decade. The credit rating agencies Standard & Poor’s and Fitch Ratings have warned that they may downgrade India’s sovereign debt to junk status if it doesn’t bring its ballooning budget deficit under control.

Many of the government’s proposals, including reduced subsidies for food and fuel, are deeply unpopular. Moreover, the governing alliance, led by the Indian National Congress Party, recently lost its majority in the lower house of Parliament, which will make it hard to enact legislation.

“Most emerging market governments only carry out reforms when they have their backs to the wall,” said Ruchir Sharma, an executive at Morgan Stanley and author of the recent book “Breakout Nations: In Pursuit of the Next Economic Miracles.” “The government is under siege and they are reacting to that.”

Though Mr. Rajan’s current post does not carry any executive authority, his return to India has attracted attention because many policy analysts consider him to be the leading candidate to take over the top job at India’s central bank, the Reserve Bank of India, next year when the current governor, Duvvuri Subbarao, retires.

Mr. Rajan, 49, became famous in the economics profession for his prescience in warning about the growing risks in the financial system at a Federal Reserve conference in 2005, three years before the failure of Lehman Brothers. He argued that innovations and deregulation appeared to have made the global financial system riskier, rather than safer and more stable as many economists and top policy makers like Alan Greenspan then believed.

The son of an Indian diplomat, Mr. Rajan grew up around the world and in New Delhi, earning degrees from prestigious Indian universities before studying economics at the Massachusetts Institute of Technology. His first big policy job came when he was appointed the chief economist of the International Monetary Fund. Since 2008, he has been an external adviser to Mr. Singh, who is his highest-placed champion in India and who also asked him to lead a committee to propose changes to the country’s financial system.

Mr. Rajan has made no secret of his distress with the slow pace of change in the country in recent years. But friends and associates say he believes that policy makers now feel under pressure to speed up the country’s transition to a more liberal economy because growth has slowed sharply ahead of the next national election scheduled for 2014.

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Mr. Chidambaram, the finance minister, said he had come to expect unvarnished advice from Mr. Rajan. “I’ve known Raghu for quite some time,” he said, “and when he joined the office here I told him one thing: ‘You are the adviser. You just tell us the truth.’ I think Raghu will do exactly that. He will tell the people of India the truth."

In the interview, Mr. Rajan said he and Mr. Singh had discussed his return to India for several years. While he dismissed the speculation about the Indian central bank job, he said he saw his new position in the government as an “open-ended opportunity,” not a short-term stint. He says he put aside plans to write a book on democracy and capitalism to take his new job.

He is committed to teaching classes in the fall quarter in Chicago but plans to move to India full time in December. His wife and his son will join him at the end of the school year; he also has a daughter in college.

“I feel I owe something to the country,” he said. “Also, I think the chance of even having some small influence that helps, that is multiplied by 1.2 billion lives, it’s such an immense opportunity.”

Mr. Rajan said he would like to focus his efforts on three big themes: liberalizing India’s financial system; making it easier to do business, particularly for entrepreneurs and manufacturers; and fixing India’s dysfunctional food distribution system, which wastes a lot of food even as many of the country’s poor are malnourished.

But the Indian bureaucracy’s resistance to new ideas, which he highlighted in his April speech, may well stymie Mr. Rajan, just as it did his predecessor, Kaushik Basu, an economist from Cornell University who was recently appointed the chief economist of the World Bank.

Mr. Rajan needs to learn quickly “on the job in a situation where learning is not very easy,” said Rajiv Kumar, who heads the Federation of Indian Chambers of Commerce and Industry and is a former Indian government economist.

Mr. Rajan said he understood the risks but believed that India’s policy makers had been more open to change than many critics acknowledged. He pointed out that despite significant initial opposition, including from the central bank, Indian officials have adopted many of the proposals from the committee he led, including allowing Indian banks to open branches in most of the country, though not in big cities, without the Reserve Bank’s permission.

“The message from our report is that nothing in India will get done immediately,” he said. “It’s by the time your report gets forgotten, becomes part of the woodwork, that it really starts having an effect.”

Jim Yardley contributed reporting.

A version of this article appears in print on October 6, 2012, on Page B3 of the New York edition with the headline: As Its Economy Sags, India Asks a Critic to Come Home and Help Out. Order Reprints|Today's Paper|Subscribe